Wednesday, February 11, 2009

Lyondell bid to stop CDS holders

By Anousha Sakoui
Published: February 10 2009 20:23 Last updated: February 10 2009 20:23
The US unit of LyondellBasell, the world’s third-largest petrochemicals group, has taken action to prevent a group of creditors from attempting to trigger payments on derivative contracts related to other units.
Lawyers for Lyondell Chemical, the US unit that is in Chapter 11, have secured a temporary restraining order and preliminary injunction against a group of creditors.
The group includes bondholders that the company believes were looking to enforce claims in a bid to trigger protection payments under their credit default swap contracts, but which could have led to other parts of the group being pushed into insolvency in Europe.
Restructuring specialists believe that investors in CDS, which provide a kind of insurance against corporate default, could cause big disruptions in a wave of complex cross-border corporate restructurings expected this year.
“The threat of CDS holders trying to force companies into an insolvency in order to trigger their recovery rights against their CDS counterparty will almost certainly be an issue in the wave of debt restructurings this year,” said Mark Hyde, head of debt restructuring at Clifford Chance, an adviser to LyondellBasell in Europe. Mr Hyde said that in cases where investors attempted such actions, it could undermine chances of completing a successful restructuring. Mr Hyde declined to comment on the specifics of the Lyondell case.
LyondellBasell could become an important test case for CDS markets and the restructuring industry.
There have already been a number of cases where CDS investors have been able to exert a strong influence on either the financing or restructuring of companies. These include VNU, the multinational media business, GUS, the UK retail group, and Cablecom, a Dutch communications company.
However, there have not yet been reported examples of CDS investors forcing a company into insolvency simply to trigger protection payments from the contracts they have bought.
Large multinationals, with operations in various jurisdictions, are likely to be most at risk as the companies themselves or their creditors look to exploit differing bankruptcy regimes for their own advantage.
Lyondell Chemical, the US unit of LyondellBasell, entered Chapter 11 protection from creditors in January after an unsuccessful attempt to restructure its $26bn of debt. This triggered pay-outs on CDSs related to bonds issued by the US unit.
However, some of the European and Asian companies were kept out of the process and CDS contracts written on bonds of these units were not triggered.
There is a concern that CDS investors in attempting to trigger their contracts could damage the restructuring process.
In its court filing, the company said “the potential loss of control to a foreign liquidator would be disastrous to the debtors’ reorganisation efforts”, and described the potential consequences as “severe, immediate and irreparable”.
Copyright The Financial Times Limited 2009